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Chapter 2: Project Cash Flows
The definition, identification, and measurement of cash flows relevant to project evaluation.
1
Why Cash Flows?
Cash flows, and not accounting estimates, are used in project analysis because:-
1. They measure actual economic wealth.
2. They occur at identifiable time points.
3. They have identifiable directional flow.
4. They are free of accounting definitional problems.
2
The Meaning of RELEVANT Cash Flows.
A relevant cash flow is one which will change as a direct result of the decision about a project.
A relevant cash flow is one which will occur in the future. A cash flow
incurred in the past is irrelevant. It is
s A relevant cash flow is the difference in the firm’s cash flows with the project, and without the project.
3
Cash Flows: A Rose By Any Other Name Is Just as Sweet.
Relevant cash flows are also known as:-
Marginal cash flows. Incremental cash flows. Changing cash flows.
Project cash flows.
4
Project Cash Flows: Yes and No.
YES:- these are relevant cash flows -
Incremental future sales revenue.
Incremental future production costs. Incremental initial outlay.
Incremental future salvage value. Incremental working capital outlay.
Incremental future taxes.
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